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Investment opportunities and leverage: some Australian evidence on the role of board monitoring and director equity ownership

journal contribution
posted on 2002-01-01, 00:00 authored by Marion Hutchinson, Ferdinand Gul
This paper tests the hypothesis that the negative relationship between investment opportunity set (IOS) and debt is moderated by board monitoring and director equity ownership. According to contracting theory, firms with high growth opportunities (high IOS) are associated with lower levels of debt as a result of the asset substitution and the under-investment problem. However, our hypotheses test the conjecture that the negative debt / IOS relationship will be moderated by the proportion of non-executive directors (NEDs) on the board and director equity ownership. NEDs provide higher monitoring which reduces management discretion while director equity ownership provides incentives for managers to maximize the value of the firm. More specifically, we expect that high growth firms with a higher proportion of non-executive directors and director equity ownership are less likely to be associated with asset substitution and under investment. Thus, the negative investment opportunity set / debt relationship will be weaker for firms with higher levels of non-executive directors and high director equity ownership. Data collected from Australian companies support both these two hypotheses. Results have significant implications for corporate finance theory.

History

Journal

Managerial finance

Volume

28

Issue

3

Pagination

19 - 36

Publisher

Emerald Group Publishing

Location

Bingley, England

ISSN

0307-4358

eISSN

1758-7743

Language

eng

Publication classification

C Journal article; C1.1 Refereed article in a scholarly journal

Copyright notice

2002, Emerald Group Publishing

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